Chapter 13 and Mortgages
Chapter 13 bankruptcy gives you up to five years to work out your mortgage problems. Mortgages on the house you live in – residential mortgages – are different than mortgages on any other real estate. According to the Bankruptcy Code and the Supreme Court, you can’t change the interest rate or the payment terms of a mortgage on your house in chapter 13. On the other hand, we do have the possibility of making important changes to mortgages on any other real estate you might own.
Chapter 13 trustees and courts may not like the idea of you keeping real estate that you don’t need, especially if the expense of the real estate reduces the amount of money you could pay to your other creditors. So we have to work out your budget carefully.
Taking care of arrears
In general, people use chapter 13 in order to pay back any unpaid mortgage payments. We call this a “cure and maintain plan” because you can cure the defaults in your mortgage over a five year period and then simply “maintain” current payments on your mortgage as required under your deal with the lender. This is a good deal if you have some equity in your home that you would like to protect and if the payments on your mortgage are reasonable. “Cure and maintain” plans make sense for people who were temporarily unable to make their mortgage payments through causes like unemployment or illness.
Nowadays many homes have lost equity because of the housing crisis over the past few years. So you need to decide whether you want to keep your house. We think that the smartest thing to do is to compare what you are paying for the house under chapter 13 to what you would pay for renting or buying some other property.
Another important feature of chapter 13 is “lien stripping.” This lets you get rid of your second mortgage when it is completely “underwater” – in other words, when your property is worth less than what you owe on the first mortgage. In order to get rid of your second mortgage lien, you’ll need an appraisal to demonstrate that your house is worth less than your first mortgage. We will then file a motion or complaint with the bankruptcy court. The court will determine that the holder of your second mortgage really doesn’t have a mortgage at all. Instead, the court will order that the holder of your second mortgage has only an unsecured claim – just like one of your credit cards. If you make all the payments under your chapter 13 plan, you’ll accomplish two things. First, you’ll get a discharge of all of your debts. And just as important, you’ll get an order declaring that the second mortgage lien is null and void. You will own your home with just a first mortgage. This is a huge benefit of chapter 13. Your house might have been “underwater” and now you have the hope of building some equity in your investment.
Non-residential real estate
If you have a mortgage on real estate which is not your residence, chapter 13 can be a real help. You have to meet the debt limits of chapter 13 – in other words, no more than about $1.1 million in debt. But if you have an investment property which has a mortgage on it, you can modify the mortgage in chapter 13. You can reduce the interest rate. You can also divide the mortgage into two parts – a secured claim equal to the value of the building and an unsecured claim for the difference. The catch is that you have to pay the secured claim in full over the 5 year period of your plan.
Mortgage Litigation in Chapter 13
Frequently, lenders don’t treat borrowers fairly. Maybe the lender didn’t give you a modification agreement after you made the trial payments. Maybe the lender didn’t apply your payments properly. You could sue the lender. The Bankruptcy Court probably is not the right place for this suit. Still, your chapter 13 case can take into account lawsuits against the lender in another court. A lawsuit against the mortgagee might give us the tools to negotiate a better plan for you in chapter 13.
Objecting to improper claims
Lenders frequently do file proofs of claim in your chapter 13 case. We can object to the claim. We can make the lender give you a fair and honest accounting. We can make the lender prove that it really is your lender. Once the lender makes a claim, we can raise many issues which can help us negotiate a better plan for you. When we object to a mortgage lender’s claim, we can require the lender to produce documents through discovery. We can require the lender to produce witnesses to give testimony. Lenders don’t like to do this and frequently will settle their claims favorably to you. Even if the lender doesn’t file a proof of claim, we can file a complaint to determine the lenders’ interest in your chapter 13 case. We don’t do this in every case. We always discuss the costs and benefits of every step we might take in your chapter 13 case.
Fees in Chapter 13
We handle normal chapter 13 cases for a set fee. This fee is set by the bankruptcy court. We handle chapter 13 cases involving litigation on an hourly basis. All fees in chapter 13 must be approved by the bankruptcy court. Ask us about our fees when you hire us to represent you in your chapter 13 case.